Hertz Could Buy Back 20% of Stock After Rental Spin

Written by: Antoine Gara03/18/14 - 4:36 PM EDT

Tickers in this article:
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Updated from 1:26 p.m. ET to include closing share prices

NEW YORK ( TheStreet) -- Hertz said Tuesday it will spin off its equipment rental business, Hertz Equipment Rental, in an effort to refocus on the company's car rental business. The spinoff of Hertz' equipment rental business is expected to generate $2.5 billion in cash that will be used to pay down the company's debt and support a newly approved $1 billion share repurchase.

Overall, the spinoff may dramatically alter Hertz' capital structure, putting its leverage in line with competitors, while providing Wall Street with a far more straightforward car rental business. The move also comes as Hertz provided investors with a weaker-than-expected outlook for 2014.

Tuesday's decision to spin the equipment rental business may help Hertz weather a rough patch in the car rental market, while also insulating the company and its management from activist investors.

Hertz's newly announced share repurchase could allow the car rental chain to buy back 20% of its outstanding shares, the company said in a Tuesday statement. Hertz also raised the prospect of additional returns of capital to shareholders as a result of the company's targeted net debt ratio of 2.5-to-3.5 times earnings before interest, taxes, depreciation and amortization (EBITDA).

Those targets indicate Hertz could see its leverage rise from year-end net-debt of 2.9 times EBITDA, putting the company closer in line with Avis Budget . Analysts had forecast Hertz net debt-to-EBITDA could fall in the coming year without a change to its capital planning.

"The actions announced today will create separate companies which we expect to benefit from improved financial profiles that include increased earnings stability and higher returns on capital," Mark P. Frissora, CEO of Hertz said in a statement.

Equipment Rental

Hertz Equipment Rental may be renamed and will have its own management team after the spinoff. The business generated annual revenues of over $1.5 billion in 2013, with 38% of those sales from construction market, 26% from industrial users, and a further 36% from other markets including niche markets like the energy sector.

At separation, the business is expected to have net debt of 3.5 times-to-4.0 times 2014 earnings before interest, taxes, depreciation and amortization (EBITDA).

Hertz will retain its Donlen fleet leasing business.

Hertz and Dollar Thrifty

For Hertz's more well-known car rental business, the spinoff may improve the company's cash flow, allowing the company to return capital to shareholders.

The spinoff may also give investors access to a pure-play car rental business that may be in recovery after the market was dramatically oversupplied in the years since the financial crisis. Consolidation such as Hertz takeover of Dollar Thrifty, and a recovering economy may also allow rental giants like Hertz, Avis Budget and Enterprise to regain their pricing power.